If you’re after the best high-yield investments in the FTSE 100, what criteria are you looking for?
I might suggest a current big yield, good long-term cover by earnings, a progressive dividend policy, and a commitment from the company to keep making its annual payments even during short-term downturns. But can you get all of those anywhere?
I reckon you can, and that the past few years have proven BP (LSE: BP) to satisfy all those requirements with aplomb. Let’s look at the current state of affairs…
BP shares are currently forecast to pay 30p per share in dividends this year. On today’s share price of 565p, that’s a 5.3% yield. That’s significantly above the FTSE 100 average, which currently stands at around 4.4%, and clearly satisfies the first of my suggested requirements.Â
Crisis over?
What about cover by earnings? With forecast earnings per share expected to come in at around 39.5p, we’re looking at forward cover of around 1.3 times this year. Whether that’s good enough depends on the business itself and its long-term trends — and if that’s the way cover was likely to remain, I’d be a bit sceptical of it and I’d want to see something a bit stronger.
But that brings me on to my fourth point, and that’s the company’s long-term commitment. BP has been through a horrendous decade, starting with the Deepwater Horizon disaster — but while the dividend had to be slashed to help pay for the clean-up costs, it was reinstated surprisingly quickly and has been maintained.
Since then we’ve seen the price of a barrel of oil plunge to a low of under $30, a level that would be crippling to many of the world’s producers had it continued over the long term. But that’s the very reason why it couldn’t be sustained at such paltry levels, and I think that was obvious right from the start of the oil crisis — and two years ago I was predicting stabilisation at or better than $70 per barrel or so.
BP chief executive Bob Dudley predicted low oil for a few years, but the company steadfastly stuck to its policy of paying its dividend — seeing its annual payment as something that should reflect the long-term value of the company rather than the vagaries of short-term sentiment.
Steady dividend
And so the dividend was maintained at 40 cents per share right through the oil price depression — and if you’d bought at the 2016 lows of around 325p, you could have locked-in effective long-term yields of around 9%. You could retire rich on that.
To me, that unequivocally demonstrates that BP has an eye to the long-term rewarding of its shareholders, and is focused on providing returns that are not dependent on short-term shocks.Â
How about progressive returns? I was assured by the words of chief financial officer Brian Gilvary at FY results time for 2017. He said: “Our organic cash flows are back in balance and our financial frame remains resilient…Â Our share buyback programme in the fourth quarter offset the dilution from scrip dividends issued in September and our intent remains to offset any ongoing scrip dilution through further buybacks over time.“
That sounds like a focus on growing shareholder returns. One of the FTSE 100’s very best long-term dividend winners? I think so.